While Greece Downgraded, Qatar And UAE Upgraded By MSCI [ANALYSIS]

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Qatar and UAE’s years of efforts have finally been rewarded as both the countries have been upgraded to “emerging market” status thanks to steps taken by exchange officials in both countries to win the confidence of global investors. UAE and Qatar’s upgrade to membership in the index is expected to take effect around May 31, 2014. Qatar would account for 0.45% of the weighting of the Emerging Markets index, with the UAE accounting for 0.4%.

Qatar Flag

The said exchanges had first sought index inclusion in the emerging markets index in 2008 and had been denied entry to the grouping five times since the first review in 2009. The move is a major sign of approval from institutional investors for the countries’ stock markets, and is expected to attract more stable sources of capital to local equities.

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Major reason for their inclusion by May 2014 has been the positive developments with regard to market infrastructure in some countries. In Qatar and in the UAE, the operational efficiency of the Delivery Versus Payment (DVP) model has been enhanced through the introduction of a proper false trade mechanism that includes (in the case of Qatar) or will include (in the case of the UAE) securities lending and borrowing facilities.

This has improved the confidence of international institutional investors in the safeguarding of their assets and a majority of them has started to migrate from a dual-account structure to a single account structure. As a result, the Custody measure has been upgraded from “-/?” to “+” in both markets.

Developments in Qatar and UAE

MSCI also announced that it is closely monitoring the situation in Egypt, in particular the negative developments in the foreign exchange market. MSCI may launch a public consultation on potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation is seen to worsen in the coming months.

Qatar and UAE: Expected impact of inclusion in MSCI Emerging Market

MSCI Emerging Market has become the reference index for global emerging equity markets and is by far the most widely adopted benchmark for appraising emerging market fund managers. Many foreign investors and fund managers closely track emerging markets. Most of international institutional equity assets in USA and Asia are benchmarked to MSCI indices. And two-thirds of fund managers across Europe use the MSCI Indices as their international index provider. In absolute terms, around USD 1.5 trillion are benchmarked against the MSCI EMF index.

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Making an upgrade to EM status is key to boosting liquidity and attracting investors to the region’s stock markets and therefore the said inclusion would likely channel a large amount of funds, both benchmarked against and tracking the index, into these countries.

Once UAE and Qatar are formally included in May 2014, a sizeable amount of net inflow could find its way into these markets from EM funds even if assuming a neutral weighting for the region (index funds). In addition, this flow would be mostly from institutional funds with a long term investment horizon, unlike most of the current flow that is characterized by short-term opportunistic hedge fund money.

Market Performance YTD

Outlook Of Qatar And UAE

Dubai and Abu Dhabi have been the top performing markets in 2013. The major reason for such an exceptional growth has been the rebound in real estate and construction market. Not only Real Estate stocks have rallied but the same has been witnessed in Banking and Construction companies as both the sectors are highly associated with Real Estate. On the other hand Qatar has been a late starter but has recently picked up pace and currently stands at low end of the table amongst GCC in terms of return. MSCI upgrade has also been a prime reason for the run up in both the countries.

Although the news would be taken very positively by the investors, foreign funds tracking the MSCI benchmarks will likely start to invest only after the reclassification takes effect in May next year. The market seems to have given a thumps up to the news evident by the 2%+ opening jump today. Although this is related particularly to UAE and Qatar, the upgrade will also bring other regional markets into the focus of EM fund managers leading to a positive sentiment overall.

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